Question

Kingsport Containers Company makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes plantwide predetermined overhead rates on a quarterly basis using the number of units to be produced as the allocation base. Its estimated costs, by quarter, for the coming year are given below:

   

	Quarter
	First			Second			Third			Fourth
Direct materials	$	160,000		$	80,000		$	40,000		$	120,000
Direct labor		80,000			40,000			20,000			60,000
Manufacturing overhead		230,000			206,000			194,000			?
Total manufacturing costs (a)	$	470,000		$	326,000		$	254,000		$	?
Number of units to be produced (b)		80,000			40,000			20,000			60,000
Estimated unit product cost (a) ÷ (b)	$	5.88		$	8.15		$	12.70		$	?

Management finds the variation in quarterly unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product.

Required:

1. Assuming the estimated variable manufacturing overhead cost per unit is $0.60, what must be the estimated total fixed manufacturing overhead cost per quarter?

2. Assuming the assumptions about cost behavior from the first three quarters hold constant, what is the estimated unit product cost for the fourth quarter?

3. What is causing the estimated unit product cost to fluctuate from one quarter to the next?

4. Assuming the company computes one predetermined overhead rate for the year rather than computing quarterly overhead rates, calculate the unit product cost for all units produced during the year.

Answer 1

Answer 1: Total Manufacturing Overhead cost = (Variable manufacturing Overheard Cost + Fixed manufacturing overhead cost)

                Variable manufacturing overhead cost= (Unit produced * variable manufacturing   overhead cost per unit)

= 80,000*0.60

= $48,000

                   Total Manufacturing Overhead cost    = $230,000

Total Manufacturing Overhead cost = (Variable manufacturing Overheard Cost + Fixed manufacturing overhead cost)

$230,000= 48,000 + fixed manufacturing overhead cost

                  Fixed manufacturing overhead cost = $230,000 -$48,000

= $182,000 per quarter

Answer 2: Total manufacturing Cost:   {Direct materials + Direct labour + Manufacturing overheard)

                      Units produced in quarter 4 = 60,000

Manufacturing Overhead for 4^th quarter = Variable + Fixed

= (60,000*0.6+ 182,000)

                                                                                = $218,000

Total manufacturing cost for 4^th quarter = {120,000 + 60,000 + 218,000}

= $398,000

Unit product cost = Total Cost/ Unit produced

                                    = 398,000/60,000

                                    = $6.63

Answer 3: The Fixed portion of the manufacturing overhead cost is causing the unit product costs to   fluctuate because unit product increases as the level of production decreases due to fixed cost is spread over few units.

Answer 4: Predetermined Overhead rate = Estimated total manufacturing overhead cost/ Estimated total units produced

Quarter	Total manufacturing overhead Cost in $	Units
1	230,000	80,000
2	206,000	40,000
3	254,000	20,000
4	398,000	60,000
Total	1,088,000	200,000

Predetermined Overhead rate = 1,088,000/200,000

= $5.44 per unit